International Financial Reporting Standards (IFRS) is the accounting method that’s

used in many countries across the world. It has some key differences from the
Generally Accepted Accounting Principles (GAAP) implemented in the United
States.

As an accounting professional or business owner, it’s vital to know the variations of

these accounting methods, in order to successfully manage your company globally, as
well as domestically. Here are the top 10 differences between IFRS and GAAP
accounting:

1. Locally vs. Globally

As mentioned, the IFRS is a globally accepted standard for accounting, and is used in
more than 110 countries. On the other hand, GAAP is exclusively used within the
United States and has a different set of rules for accounting than most of the world.
This can make it more complicated when doing business internationally.

2. Rules vs. Principles

A major difference between IFRS and GAAP accounting is the methodology used to
assess the accounting process. GAAP focuses on research and is rule-based, whereas
IFRS looks at the overall patterns and is based on principle.

With GAAP accounting, there’s little room for exceptions or interpretation, as all
transactions must abide by a specific set of rules. With a principle-based accounting
method, such as the IFRS, there’s potential for different interpretations of the same
tax-related situations.

3. Inventory Methods

Under GAAP, a company is allowed to use the Last In, First Out (LIFO) method for
inventory estimates. However, under IFRS, the LIFO method for inventory is not
allowed. The Last In, First Out valuation for inventory does not reflect an accurate
flow of inventory in most cases, and thus results in reports of unusually low income
levels.

4. Inventory Reversal

In addition to having different methods for tracking inventory, IFRS and GAAP
accounting also differ when it comes to inventory write-down reversals. GAAP
specifies that if the market value of the asset increases, the amount of the write-down
cannot be reversed. Under IFRS, however, in this same situation, the amount of the
write-down can be reversed. In other words, GAAP is overly cautious of inventory
reversal and does not reflect any positive changes in the marketplace.

5. Development Costs

A company’s development costs can be capitalized under IFRS, as long as certain

criteria are met. This allows a business to leverage depreciation on fixed assets. With
GAAP, development costs must be expensed the year they occur and are not allowed
to be capitalized.

6. Intangible Assets

When it comes to intangible assets, such as research and development or advertising

costs, IFRS accounting really shines as a principle-based method. It takes into account
whether an asset will have a future economic benefit as a way of assessing the value.
Intangible assets measured under GAAP are recognized at the fair market value and
nothing more.

7. Income Statements

Under IFRS, extraordinary or unusual items are included in the income statement and
not segregated. Meanwhile, under GAAP, they are separated and shown below the net
income portion of the income statement.

8. Classification of Liabilities

The classification of debts under GAAP is split between current liabilities, where a
company expects to settle a debt within 12 months, and noncurrent liabilities, which
are debts that will not be repaid within 12 months. With IFRS, there is no
differentiation made between the classification of liabilities, as all debts are
considered noncurrent on the balance sheet.

9. Fixed Assets

When it comes to fixed assets, such as property, furniture and equipment, companies
using GAAP accounting must value these assets using the cost model. The cost model
takes into account the historical value of an asset minus any accumulated
depreciation. IFRS allows a different model for fixed assets called
the revaluation model, which is based on the fair value at the current date minus any
accumulated depreciation and impairment losses.
10. Quality Characteristics

Finally, one of the main differentiating factors between IFRS and GAAP is the
qualitative characteristics to how the accounting methods function. GAAP works
within a hierarchy of characteristics, such as relevance, reliability, comparability and
understandability, to make informed decisions based on user-specific circumstances.
IFRS also works with the same characteristics, with the exception that decisions
cannot be made on the specific circumstances of an individual.

It’s important to understand these top differences between IFRS and GAAP
accounting, so that your company can accurately do business internationally. U.S.-
based companies must abide by specific accounting regulations, even if they plan to
do business internationally.